The Korean Struggle

& Gary Dymski

Just a few months
after getting a clean bill of economic health from the OECD in mid 1997, South Korea’s
economy plunged into a foreign exchange crisis. By December the Korean government had
signed a loan agreement with the IMF. The severity of its terms were unprecedented.
Koreans quickly spread the bitter joke that the IMF means “I Am Fired.” Given
the long tradition of labor and student militancy in Korea, and the election to the
presidency just days later of populist Kim Dae Jung (who had called the IMF deal a “national
humiliation”), it seemed likely that the virtual takeover of the Korean economy by
the IMF would generate resentment and spark resistance in the new year.

But no such
resistance appeared. A consensus quickly formed among the U.S., IMF, and Korean political
and economic leadership that Korea must dismantle its long-admired model of state-led
development, throwing open its borders to overseas goods and money and its asset and
banking markets to overseas owners. An embittered, fatalistic acceptance of the
inevitability of the Neoliberalization of the Korean economy seemed to infuse the national
psyche. U.S. and IMF complicity in this externally imposed revolution was no surprise, but
Kim Dae Jung’s quick switch from an anti- to a pro-IMF position, which infuriated his
labor supporters, certainly did. After all, the IMF program would mean economic collapse,
mass layoffs, and a loss of economic sovereignty. Yet mass protests by workers and
students did not take place, and by February Korea’s crisis was pushed off the front
pages of Western newspapers.

These events
generated a number of questions in the minds of interested outside observers. Why did Kim
Dae Jung suddenly change his view? Did most Koreans share his newfound enthusiasm for
neoliberalism? Why were Korea’s political leaders willing to walk away from their
amazingly successful and long-standing development model and accept its replacement with a
Neoliberal model that has brought disaster to labor and the majority of citizens wherever
it has been implemented? Where was the expected mass resistance to the IMF takeover of

We spent the last
two weeks of March in Korea at the invitation of Professor Kim Soo Haeng of Seoul National
University, Korea’s most respected progressive political economist. We had the
opportunity to discuss these and other questions with an unusually broad array of Koreans
from diverse social positions—top managers and officials in banking and industry,
important government officials, leaders of the more militant of the two Korean labor
federations, students, and academics. Days of discussion yielded some tentative answers to
our questions.

An understanding of
the Korean crisis requires historical perspective. For the past three and one-half decades
the Korean economy has been organized according to the general principles of the so-called
“East Asian economic model,” an approach often referred to as state-led growth
or the state-governed market economy. The Korean government provided temporary import
protection for domestic markets introducing new products or technologies, focused the
development of high tech production capabilities on a small number of diversified
companies termed chaebol, coordinated chaebol investment decisions, allocated credit
toward priority industries and technologies, and tightly regulated the cross border
movement of money. At the same time, the government selectively opened markets to import
competition and imposed export performance criteria in return for government aid to insure
that key industries achieved world-class efficiency.

The Korean economic
model has been astoundingly successful. Over the past 35 years it achieved an average
annual rate of growth of both real per-person national income and real wages of about 7
percent while maintaining full employment and a relatively equal income distribution.
Korea’s success was so indisputable that it demonstrated to those not ideologically
committed to Neoliberalism that there were practical, superior alternatives to the free
market development model. Of course, much of Korea’s growth took place under an
authoritarian political system, but in 1987 long-term, heroic struggles by the militant
Korean labor and student movements finally toppled the military regime that had ruled
Korea off and on until that time.

The East Asia
alternative development model has become increasingly important in the last 20 years as
more and more countries adopted Neoliberal economic policies, sometimes willingly, more
often under external pressure. Under the Neoliberal approach, resource allocation is left
to the vagaries of market forces, domestic and international financial flows are
unregulated, and foreign ownership of domestic assets is encouraged. These economic
policies have created a world of globally mobile capital and disenfranchised governments.
Most economies in Latin America, Africa, Eastern Europe, and the former Soviet Union have
adopted “market-friendly” policies of this sort, and their people have suffered
enormously as a result.

East Asia was the
last important area of the globe to successfully resist the encroachment of the Neoliberal
regime. Should the current crisis signal the end of this resistance, the effects on the
people of Asia and, indeed, the rest of the world may be profound. In the stagnant world
economy of the 1990s, East and South East Asia, constituting 25 percent of global GDP,
have accounted for half of the growth of world GDP. Were Asia to now shift to the slow
growth, high unemployment path of the rest of the Neoliberal world, no country could long
escape the consequences.


What caused Korea
to experience this system-shaking crisis? We posed this question to everyone we
interviewed. The most common answer stressed internal problems—not pressure from the
U.S. or IMF, pointing an accusing finger first at the chaebol, then the government. In the
late 1980s and 1990s the chaebol began to make their presence felt in such up-scale global
industries as semi-conductors and automobiles; Samsung, for example, became the world’s
largest chip-maker. By the early 1990s they believed they were positioned for a serious
run at the U.S. and European consumer markets. The ambition of Korea’s chaebol to
become serious rivals to the most powerful Western and Japanese multinational corporations
is thought by most Koreans to have begun the chain of events that terminated in the crisis
of 1997.

To achieve their
objectives the chaebol had to undertake major new investments in Korea and elsewhere that
were so large they could not be financed through profits or equity issues. To help raise
the needed funds, the chaebol successfully pressed the government to deregulate domestic
financial markets, then proceeded to increase domestic borrowing dramatically. Of
particular importance, the government licensed 24 new merchant banks between 1994 and 1996—some
with substantial chaebol ownership interests, and in a shocking reversal of tradition,
left these banks virtually unregulated. The chaebol also needed assured access to foreign
markets, which led to a Korean bid to enter the OECD. The price of entry included a
promise to accelerate the deregulation of cross border capital flows as well as domestic
financial markets. This suited chaebol interests because their credit needs exceeded the
capacity of domestic markets and Korea’s interest rates were much higher than global
rates. Once capital inflows were deregulated, short-term foreign money—especially
bank loans—poured into the country. The new merchant banks proceeded to borrow
heavily from foreign banks, relending most of the money to the chaebol. Total foreign bank
loans doubled from 1994 to 1997 to about $120 billion, an astounding 60 percent of which
had to be repaid within one year.

The stage was now
set for the outbreak of a financial crisis. The chaebol had financed a risky long-term
capital boom primarily with short-term loans, a large part of which were in foreign
currency. Any set of events which led to chaebol profit problems andor disappointing
export earnings—an overvalued won, sluggish export markets, rising foreign interest
rates, or a domestic recession—would lead to delayed interest payments and eventually
to defaults on foreign loans, triggering a run on the won, a collapse of the Korean stock
market, and a mass refusal by foreign banks to roll their loans over.

The government
helped them do it. In contrast to the near universal opinion expressed in the Western
press, most Koreans correctly understand that their crisis was not caused by too much
government regulation, but by too little. It was excessive liberalization, not the
traditional East Asia model that failed.

As the Korean
financial situation deteriorated, Koreans prepared to vote for a new president. Kim Dae
Jung’s fortunes rose as he attacked the IMF in public forums. But just days before
the election the U.S. and IMF threatened to create economic chaos in Korea unless all
three presidential candidates vowed their commitment to an IMF agreement over which two of
them had no control and whose provisions they did not even understand. They all
capitulated to this extortion. Following his election and thereafter, Kim consistently
argued that IMF-mandated neoliberal restructuring would be the salvation of the Korean
economy. This position reflected a theme Kim has stressed for 30 years—to break the
power of the families who own the chaebol and end their repressive alliance with
authoritarian Korean governments, it is necessary to liberalize Korean markets. Kim
believed that chaebol domination of the economy, government, and even civil society was
the deep seated cause of Korea’s current crisis. Most academics, students, government
officials, and bankers we talked with echoed this theme—everyone in Korea, we
discovered, hates the chaebol.

We were stunned to
learn that even many progressive Koreans welcomed IMF intervention, believing it would
provide them with weapons they could use to bring about the downfall of the chaebol and
the disciplining of the government. They hoped that increased foreign ownership of Korean
firms and banks and the breakup of the chaebol empires would drastically reduce the
concentration of economic and political power in Korea. As economic power became more
dispersed, they argued, labor would become stronger and the government more amenable to
democratic control. Meanwhile, the entry of foreign banks and Western banking standards
would end the wholesale abuse of the banking system that characterized the mid 1990s.

Conversations with
representatives of the chaebol revealed a different perspective on the origins of the
crisis. They trace Korea’s current problems back to the political struggles that
culminated with the end of the military dictatorship in 1987. In the chaebol’s view,
labor used the increased power gained through these struggles to obtain real wage gains
that exceeded productivity growth, causing a secular crisis of profitability and
international competitiveness for the chaebol and thus for the Korean economy. And the
government’s power to regulate chaebol activity hindered their attempts to respond to
this profit crisis. The chaebol were thus forced to undertake their overly ambitious
capital accumulation program of the mid 1990s and attack government regulation of
financial markets. They sought lower costs by shifting operations overseas and adopting
advanced, often labor-saving, technology at home. As the chaebol see it, then, the
long-standing conflict between Korean capital and labor was the most deep-seated cause of
the current crisis.

These same
conversations unearthed an incredible irony: like the progressive academics we spoke with,
the chaebol believe they can use the provisions of the IMF agreement to defeat their
internal enemies—labor and the government.


The IMF agreement
has a number of key demands with profound consequences for the Korean economy: austerity
macro policy, very high interest rates plus restrictive fiscal policy, which will cause
recession, raise unemployment, and force a tidal wave of bankruptcies, especially among
small and medium businesses; the imposition of stringent banking regulations in a
financial crisis, when most banks cannot possibly meet them, forcing both bank failures
and a drying up of credit for Korea’s beleaguered businesses; labor law “reform”
which, for the first time, will allow firms to fire workers at will; the removal of all
restrictions on foreign ownership of Korean firms and banks; the elimination of
restrictions on imports (including Japanese cars, a provision the chaebol fear); and the
elimination of all forms of government influence over both domestic and international
capital flows, including even the short-term capital inflows that led to the current

Credit starvation
and high interest rates have already launched a self-feeding cycle of bankruptcies, bank
failures, declining production, and rising unemployment, which is expected to reach at
least 10 percent and perhaps 15 percent or more—in an economy with the flimsiest of
social safety nets. The chaebol (as well as foreign investors) expect labor law “reform”
and massive unemployment to smash the union movement, while other structural changes will
eliminate the government’s ability to regulate the private sector. Accelerated
liberalization will assure free access to global capital and credit markets. In addition,
chaebol family personal wealth will now be free to roam the world in search of high
returns. It is thus easy to see why the chaebol see the IMF as their ally. And chaebol
support for much of the IMF program in turn helps explain why the Korean government
offered so little resistance to its harsh terms.

But though they
will terrorize labor, defang the government, and demoralize the people, the IMF agreement
will not assure victory to the chaebol. The chaebol are weak and over indebted, even their
trading capacity is severely compromised by a lack of credit. They are in desperate need
of financial assistance from foreign companies and foreign banks, forced to offer their
assets at fire sale prices to others much bigger and more powerful. It is unlikely they
will be able to gain the financial support they desperately need without losing control of
their empires to their foreign rivals.

But the likelihood
that the people can use the IMF to obtain their objectives is smaller yet. The IMF
agreement is designed to permanently destroy the institutional foundations of the Korean
developmental model—that “East Asian” mix of government strategic planning,
industrial ingenuity, high productivity growth, and worker security that spread prosperity
so widely across Korea. Regulation through market whimsy, footloose relations between
industry and workers, high unemployment, rising inequality, and labor insecurity will
become the new norms in Korea, as they are in the rest of the neoliberal world. Many
Koreans with whom we spoke held out hope that after the IMF program had reduced the power
of the chaebol and the government, they could proceed to reconstruct an even better “East
Asian” economy reflecting deep-seated Korean values such as community and labor
solidarity. When pressed, however, no one could explain to us how this could be done when
foreigners controlled their firms and banks, their economy was fully open to global
forces, and the government had been stripped of all power to regulate the economy.

The only people we
spoke to who fully appreciated the severity of the threat to the Korean economy posed by
the IMF agreement were labor union representatives. They understood that the preservation
of Korea’s development path would require a fierce and prolonged fight to resist full
and permanent implementation of the IMF program. They were preparing for a sustained
period of massive and disciplined social protest against the IMF and all the external and
internal forces supporting it. At the time of our visit, however, no significant public
opposition to the agreement had yet taken place. Confusion, fatalism, passivity and the
false hope that the IMF could be used to win domestic battles ruled the day. But as the
damage caused by the agreement increases, with unemployment and bankruptcies setting new
records with each passing month, the preconditions required for the organization of a mass
protest movement are in the process of creation.

There are
indications that serious resistance has started. Lee Kap Yong, the newly elected head of
the militant Korean Confederation of Trade Unions (KCTU), threatened massive strikes in
late May or June to prevent the chaebol’s planned massive layoffs (estimated to be at
least 500,000 or one-third of their work force). Since his election was understood to be a
repudiation by the rank and file of their former leaders for accepting February’s
labor law “reform,” Lee immediately demanded that Kim Dae Jung negotiate a new,
more worker-friendly, labor law. This demand, which has the support of the larger, less
militant union federation, infuriated Kim, the chaebol, foreign investors, and the IMF.
Hyundai Motors union leaders threatened to strike if the company attempted to carry out
its layoff plans. Large numbers of unemployed demonstrated in Seoul and Pusan in April;
and while the government declared unions of unemployed workers illegal in March, People’s
Victory 21, a political organization affiliated with the KCTU, organized a national
alliance of the unemployed. And 22,000 demonstrators organized by the KCTU gathered in
Seoul on May Day to protest the IMF program and the government’s role in its
implementation. The government reacted to this renewed popular resistance with repressive
tactics familiar from the days before Korea’s democracy was secured, threatening
resistors with imprisonment.


The problem facing the militant labor union movement, the only force presently capable
of organizing an effective protest movement, is if they fail to effectively resist the
mass layoffs which the chaebol say will begin shortly, they will be severely weakened,
perhaps destroyed. But successful resistance to such powerful adversaries in these
dangerous conditions will require the creation of a united coalition linking the majority
of workers and students, one that has the sympathy of the broad middle class.
Unfortunately, the creation of such a coalition may take more time to secure than the
unions have available to them. We can only hope that, as on so many occasions in their
history, the Korean people will find the courage and strength needed to sustain themselves
in this struggle, a struggle of monumental importance to the eventual outcome of the
undeclared, ongoing global war between national autonomy, community, and worker security,
on one hand, and the privileges and power of Neoliberal capital and global elites on the